Card payments – Who am I dealing with? The parties involved are changing... again

In four party models (those that involve Mastercard and Visa), include:

Cardholders – like us.

Merchants – the shops that we use, whether in the high-street or on-line.

Card Issuers: usually banks that provide us with the plastic-card, the CHIP, PIN and then our statements and customer services.

Merchant Acquirers: which provide the equipment to accept payments, but which also settle against the issuers globally through the card schemes and most importantly take the risks involved in doing so.

How these parties operate with one another is shown in figure 1 below. Contracts exist between each party, whether formal, OR

a) the sale of goods and services contract (in shop),
b) Visa and Mastercard rules and contracts – through which issuers and acquirers connect globally.

Figure 1: Base four-party model for Card Payments

This is how the processes have worked in the past, but things are changing and getting increasingly complicated.

Newer Parties

Businesses have evolved because of a need for evolution, and/or because of an evolving internet, mobile technology, increasing demands of ‘new solutions’ from merchants and the need to serve ever-newer cardholder services. Acquirers of yesteryear (banks) did not or could not change with market demands. The types of organisations that have evolved include:

Sales/Introducer organisations

Organisations that ‘sell to’ merchants on behalf of acquirers. Often these ‘take a cut’ of all transactions, and often contractually taking some of the work and the risks.

Technical Gateways

Companies that provide merchants with specialist connectivity / IT solutions in the process; aim to link the merchants to the acquirer akin to an internal IT department for payments. These may include specialist data security and tokenization solutions.

Intermediate Processors - PSPs/ Payment Facilitators

Companies that work with the merchants to process transactions to acquirers, and/or other parties for ‘other’ payment types; adding services that acquirers did not or could not provide. These may be specialisms for particular markets or for particular software or applications. Elements of technical gateways and/or specialist data security and tokenization solutions may be involved.

Acquirer Processors

Companies who will provide the processing services for multiple acquirers, or increasingly, also act as acquirers too; and/or offer ‘white-label’ acquiring solutions/platforms and services.

These are shown in figure 2 - Complications include:

- Many different ‘names’ for parties involved across geographies, by the organisations themselves, through the categorisation of these by the card schemes/ regulators. These names change as the market changes.

- Many of these parties overlap into one another e.g.

A sales/introducer may also start to provide equipment or software, a gateway solution, and/or become an intermediate processor themselves.

Intermediate processors, may apply for their own acquiring licences to become banks and/or Visa / Mastercard licensed businesses; or set-up or acquire sales businesses.

Acquirers may buy or establish intermediate processors, or other parties in the chain and;

Technical transaction processors (Gateways) may become sales businesses or provide intermediate processing and/or other services to the merchants.

- Three-party card schemes such as American Express and Diners can also be processed through the different parties involved above, in parallel or separately.

- AliPay and WeChat Pay are making big inroads in Europe, and are now by many reports bigger than Mastercard and Visa and have big ambitions.

- Domestic card schemes operate in many markets across the EU.

- Other payments schemes – electronic money, wallets, digital currencies.
 

Figure 2: Acquirer intermediates and disintermediation

Challenges

The challenges that arise and cause difficulties include:

a) Bank regulators required Banks to understand, monitor and continually manage all risks involved. The ‘art’ of doing so is being lost as other parties move into acquiring without the same regulation and knowledge.

b) Risks are often not identified, with credit risk largely uncalculated, untracked or ‘priced for’.

c) Customer identification can become diluted when multiple parties are involved; especially when contracts are written without it being clear who is responsible for the risks/exposures; so problems evolve.

d) Regulators and card schemes introduce many and varying rules and requirements that are often hard to understand and to communicate.

e) Capital adequacy / liquidity – banks are always required to manage this; but as non-bank acquirers develop, there is no non-bank regulator to force these business protection solutions with active regulators examining progress.

f) The fallacy that “acquiring is simple”, has led to more ‘new breed’ acquirers emerging with many quickly failing or required to stop trading when things ‘go wrong’.

Common Challenges that must be mitigated

1. Understand a) exposures, b) risk of failure, c) reward for exposures/risks; as well as all the ‘tricks’ used to con acquirers.

2. Have a clear strategy, policy, procedures, documented risk appetite, calculation methodology, management information and reporting structure.

3. Ensure that all card scheme, regulator, AML and other laws and rules are understood, stayed abreast of and corrected when they arise

4. Measure and manage all changes in business models, exposures, risks, management etc.

5. Look for daily / real-time unusual business features and ‘blips’ in the transactions away from norms and then act upon them.

6. Manage and monitor all third-parties employed or delegated-to in the process of card acquiring.

About Riskskill

Riskskill is a leading Europe-based payments and risk management consultancy, with an impressive international track record of helping payments businesses to find and mitigate payments challenges and risks. The firm works with clients to put in place strategies and programmes of work to make payments businesses or functions more profitable, less susceptible to losses, risks and regulatory issues and compliance problems. Riskskill.com is a global GARS Reviewer for Visa.

For further information, please contact: Bill Trueman or Kevin Smith at enquiries@riskskill.com

About Bill Trueman

Bill is a professional banker and a payments and risk specialist, with over 25 years of experience. He headed-up risk functions and special investigations in Lloyds Bank issuing and acquiring; acquiring and processing at First Data, and then for insurance risks at RBS / Direct Line. For the last 12 years he has been diving-into many other businesses: largely advising merchants, acquirers and others in the payment chain; to reduce risks and costs, and to find improved ways to do business and/or to make significant organisational change. He is a mentor for innovative payments startups and sits on working parties and panels for the UK regulators.